Lecture18a_winter09

Lecture18a_winter09 - CAPITAL STRUCTURE AND VALUE OF THE...

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CAPITAL STRUCTURE AND VALUE OF THE FIRM
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CAPITAL STRUCTURE AND VALUE OF THE FIRM MODIGLIANI MILLER PROPOSITION I (no taxes) The Value of the LEVERED FIRM is the same as the VALUE of the UNLEVERED FIRM . U L V V
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CAPITAL STRUCTURE AND VALUE OF THE FIRM You use OPERATIONAL CASH FLOWS to evaluate the Projects The value of the Firm is the Present Value of those Cash Flows The Cash Flows are independent of the Capital Structure the Firm chooses.
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CAPITAL STRUCTURE AND VALUE OF THE FIRM So, in different Capital Structures you are discounting the same Cash Flows and getting the same Present Value of Cash Flows, this means that: THE DISCOUNT YOU ARE USING IS THE SAME FOR DIFFERENT CAPITAL STRUCTURES!!
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CAPITAL STRUCTURE AND VALUE OF THE FIRM We use the WACC as the discount rate So, the WACC does not change when we change the Capital Structure of the Firm.
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CAPITAL STRUCTURE AND VALUE OF THE FIRM The second Modigliani-Miller Proposition tells us what is the cost of Equity for different Capital Structures We know two facts: The Cost of Equity increases with more Debt The WACC remains constant
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CAPITAL STRUCTURE AND VALUE OF THE FIRM The Second Proposition just puts these two facts together.
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Lecture18a_winter09 - CAPITAL STRUCTURE AND VALUE OF THE...

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